By: Li Miao Lovett
Bay Citizen
November 17, 2010

Small Loans Have Big Impact on Local Businesses
Microlending is helping small business owners weather the recession

In the community acupuncture room at Bu Tong Clinic, patients wait in silence away from the bustle of traffic and hawkers on Mission Street. The clinic owner, Julie Baumhofer, has seen her clientele grow as word about her low-fee acupuncture treatment continues to spread.

The clinic wouldn’t have happened without a microlender.

“If they didn’t do what they do, I wouldn’t be here now,” she says. “You don’t have to be born rich and know the right people, and you can be a business owner.”

Prior to learning about microlenders, Baumhofer says, she signed a lease for her clinic’s space before she had even obtained a loan.

“I put the cart before the horse,” she says. In February of 2009, she found that credit was unavailable from traditional financial institutions.

It was a microlender that came to the rescue. Baumhofer hadn’t had much luck with the Small Business Administration, but she noticed the awning for the Mission Economic Development Agency and walked in without an appointment. The nonprofit helped her develop a proposal for a $10,000 loan from Opportunity Fund, a leading microlender based in San Jose. Opportunity Fund’s lending has helped to create or save more than 1,200 jobs in the Bay Area, according to an independent study commissioned by the organization.

Microenterprises like Bu Tong Clinic typically employ five or fewer employees and launch with less than $35,000 in startup capital.

Small businesses are also expected to get a boost from Congress, which passed a bill in late September creating a $30 billion fund for community banks to lend to small businesses.

Such businesses are increasingly turning to microlenders, also known as community development financial institutions, a trend that has been magnified by the financial crisis.

Surveys conducted by the nonprofit Aspen Institute think tank indicate a steady growth in the number and total dollar amount of loans disbursed by community lenders between 2002 and 2008. Among 43 lenders who reported the value of their loan portfolios, the median amount increased from $598,400 to $1 million.

Increased demand for microloans has grown substantially since the recession, according to a July report issued by the Institute’s Fund for Innovation, Effectiveness, Learning and Dissemination, or FIELD. “Microlenders reported receiving applications from business owners who previously would not have had difficulty receiving funding from mainstream lenders,” the program’s director, Elaine Edgecomb, said.

Most of Opportunity Fund’s loan capital comes from partnering banks.

“We’ve had a couple of banks that have dropped out on us, which we were very disappointed in and very surprised, given what’s going on in the economy that they would pull their investments in an organization like ours, but most of them have stuck with us,” says CEO Eric Weaver. The microlender also accesses capital through foundations and government programs.

Although proponents of the congressional lending bill hope it will infuse capital into business and create jobs, federal programs for small businesses have been a mixed bag.

For example, while the Small Business Administration has offered loans through the federal stimulus package to business owners in trouble, Robyn Fountain, the program coordinator of the nonprofit Renaissance Entrepreneurship Center in San Francisco, said the system is unnecessarily complex.

Nevertheless, Fountain has seen the number of clients at her organization’s Bayview-Hunters Point location double in the past two years.

“If you don’t have education, or you’ve been in prison, it’s nearly impossible to have access to formal employment. So a lot of the time, entrepreneurship is the only way for people to lift themselves out of poverty,” says Fountain. Many residents in the predominantly African-American community don’t have access to credit and lack the credit scores for a traditional bank loan.

“One of the things we do is help business owners identify where they need access to credit and create relationships with them and bankers, specifically, the community development lenders,” she says. Renaissance also provides one-on-one counseling, business and financial management classes, as well as office space for small business owners.

Some Small Business Administration programs hold more promise, and its microloan funding program has seen recent increases. Opportunity Fund recently applied to be an SBA microlender to make loans of up to $35,000 to disadvantaged business owners. But getting federal money can be a lengthy process, reflecting the difficulty of addressing the economic crisis from a top-down approach.

Meanwhile, small businesses continue to feel the squeeze.

“There’s no doubt that banks in general have tightened the standard by which they’ll provide credit to a small business,” says the Opportunity Fund’s Weaver. His organization boasts an 85 percent survival rate among its small business clients. Opportunity Fund provides the kinds of loans that traditional banks don’t — to truckers and housecleaners, providers of health care and childcare.

Almost one-third of Opportunity Fund’s clients fall below 80 percent of the federal poverty level. At the same time, an independent study of its clients showed that every dollar lent generated almost two dollars in economic activity each year.

Back at her acupuncture clinic, Baumhofer says she realizes that her business could have fallen through the cracks. She acknowledges that she’s not the typical client for the Mission Economic Development Agency. She has an advanced degree and has long been interested in medicine. The realities of the health care system convinced her to become an alternative healer.

But she credits the agency for paving the way to obtaining a microloan from the Opportunity Fund.

Weaver started Opportunity Fund in 1992, when the Clinton Administration began to enforce the Community Reinvestment Act, a 1970’s-era law that encouraged banks to make loans in redlined communities. He saw the chance to reach out to small business owners who faced numerous obstacles.

“In general, you’re often going to find a reluctance to engage with traditional financial institutions, which could have to do with immigration status, language barriers, past experiences that have been humiliating,” he says.

“It’s important to have programs for small business, not just for reasons of financial inclusion, but also for good solid economic reasons,” says Weaver.

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